D.C. tax office whiffed on $6.5M in penalties

The District’s Office of Tax and Revenue failed to collect $6.5 million over a five-year period because it did not charge penalty fees to businesses that owed money — a punitive system now under review because officials said it was too ambiguous to enforce.

The findings were among several deficiencies highlighted in the city’s tax office through a report by the District’s office of the inspector general.

A D.C. law passed in 2010 requires businesses owing more than $10,000 in taxes to make the payments electronically. The report states that the tax office should have charged a 10 percent penalty fee for businesses that did not comply with the electronic payment requirement.

The Office of Tax and Revenue “failed to collect at least $6.5 million in penalty revenue as a result of not enforcing the 10 percent penalty,” states the report, which was dated Wednesday. The inspector general’s calculation for the lost revenue was based on the number of notices sent to noncompliant taxpayers from March 2006 to November 2011. During that time, the office mailed 31,444 notification letters to noncompliant taxpayers that explained how to pay their taxes electronically.

But a spokesman for the office of the chief financial officer said the agency did not collect fees because the electronic payment law did not specify that the agency could do so under those circumstances.

“The regulation was written but it was never enforced because there was never a penalty that was written,” CFO spokesman David Umansky said Monday.

To reconcile the issue, the CFO’s lawyer is reviewing the law, Mr. Umansky said. The inspector general’s report has recommended, if necessary, the D.C. Council take action to revise the law and allow the office to collect penalties.

The report noted additional problems, including that tax and revenue office employees could make changes to real property appraisals without the changes being detectable by management, and that the office was not documenting that taxpayers gave their authorization when they electronically filed individual tax returns through the office.

“As a result, there is no record that the taxpayers requested [Office of Tax and Revenue] employees to file returns electronically on their behalf,” the report states. The office “assumes the risk that the taxpayers may deny the accuracy of these returns or that they did not authorize filing the returns.”

The Office of Tax and Revenue has been subject to intense scrutiny and a number of reform efforts since a former manager, Harriette Walters, was arrested in 2007 for stealing more than $48 million by processing fraudulent returns. Thirty employees, including Walters, who was sentenced to 17 years in prison for the scheme, lost their jobs. When another tax and revenue office employee was arrested and later convicted in 2011 of stealing more than $400,000 from the office, officials pointed to the fact the employee was caught as proof that reforms within the office were working. Walters’ theft went undetected for 18 years.

The inspector general’s report noted that the deficiencies in management control still have not minimized the potential for fraud and put the tax and revenue office at risk for “unnecessary or wasteful spending related to inefficient resource management and inadequate planning.”